For investors looking for a supercharged yield, business development companies (BDCs) are a great choice. A BDC funds a series of smaller, often private companies and must pay at least 90% of any income earned to investors, similar to a real estate investment trust, or REIT.
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FS KKR Capital (FSK) — one of the largest BDCs with $15.4 billion of assets — leads IBD’s Dividend Leaders screen and is a top choice for income investors. The company has a portfolio of 200 companies.
By providing capital to small, often riskier companies, FS KKR Capital currently earns a jaw-dropping annualized dividend yield of 12.6%.
While the amount of the regular dividend for February is still undeclared, the company has already committed to an extra dividend of 5 cents for both February and May. This will go along with the regular dividend, which is likely to be similar to the prior quarter’s 64 cents per share.
Dividend Stock Diversifies Its Risk
As opposed to an individual investing in the debt of a smaller company, a BDC allows investors to reduce company risk by holding a large basket of investments. Nevertheless, there are still risks to BDC investments.
Foremost, the smaller companies that BDCs invest in are more sensitive to macroeconomic risks. In the event of an economic downturn, higher bankruptcy rates across the portfolio can lead to a large decline in assets and a sharp fall in share prices.
The economic risks of FS KKR Capital can be illustrated in the debt rating of the company itself. Despite a large portfolio of companies, Fitch has debt rated at BBB-, which is at the lowest end of investment grade.
Nevertheless, for investors willing to bet the economy remains relatively stable, this dividend stock is a good play. One can be rewarded through a sizable yield.
Shares of FS KKR Capital broke out of a cup-with-handle pattern on Jan. 4, hitting a buy point of 20.52. The stock has faded back and may be headed toward the 200-day moving average. So far, there’s no sell signal.
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